For many new investors, it comes as a relief to discover that it is possible to align your values with your investing goals, that you can do good and make money. Even better, sectors such as alternative energy have become exciting growth areas.
Although some of the steam has come out of the market recently, in part because of the resurgence of fossil fuel providers – with Warren Buffett one of the chief hydrocarbon cheerleaders – the desire for much greener portfolios is well established, given the twin powerful motivations of morals and money. But investors must tread carefully to avoid exposure to too much risk and to companies and funds presenting themselves as greener than they actually are. Even activist investor Carl Icahn has lashed out at asset managers for failing to back up their ESG words with actions and, in particular, for tolerating a lack of progress in certain areas of animal rights, such as how McDonald’s suppliers treat their pigs.
Investors can trip themselves up, too. In the past year I’ve seen two shockingly constructed portfolios (not from IC readers I hasten to add) where the green tilt was so unbalanced that both were flashing red on risk. One of these investors had put all of their money into a single alternative energy fund. As the greenest option she could find, and with good returns to date, the investor was happy with her choice. The second investor was similarly highly exposed to alternative energy, using a single fund and two direct holdings. It became clear when probed that neither one could afford to take such high risks, or even realised that they were doing so. These green investors, in more than one sense, did not see risk and did not consider the need for diversification. However good a fund or company looks, hitching your whole fortune to it is a reckless move.
It is possible to build an entire portfolio around ESG but don’t ignore basic investment principles concerning balance and diversification. interactive investor (ii) didn’t hesitate to boot out the top performer – the iShares Global Clean Energy ETF – from its ethical growth portfolio on the grounds that the global equity element of the portfolio also offered high exposure to the clean energy theme. “Radical action was required to maintain balance,” the company commented.
How should investors who want to bring the climate battle into their portfolio approach the task? It’s worth pointing out that a lot of the work is being done all around you. Company executives, asset managers and pension funds now must pay attention to, and report on, ESG issues. As Paul Jackson relates in his No Free Lunch column on executive pay trends (page 62), 40 per cent of FTSE 100 companies have adopted environmental and social measures, such as decarbonisation, energy reduction and diversity & inclusion, as performance conditions.
That may be too feeble an effort for many. Happily there are enough ESG fund and share choices out there to ensure that one, a handful or even every single holding in your portfolio has been tested and selected against ESG criteria and your goals and risk appetite. Platforms and advisers are making the job much easier for their customers. Interactive Investor has created a best ethical funds list from which customers can choose their own holdings to build a balanced multi-asset portfolio. Hargreaves Lansdown offers a choice of ESG funds and a responsible investing hub. Chartered financial planner Colin Low presents sustainable investment options as the norm to his clients.
Investors can choose too from companies in the electric vehicle (EV) and sustainable power space (analyst Robin Hardy will be turning his attention to US hydrogen companies in next week’s IC), specialist renewable energy and infrastructure investment trusts, and ETFs focused on the energy transition supply chain, such as HanETF’s new EV charging infrastructure ETF. We always include ESG options in our Top 50 Fund and ETF guides. And in this week’s issue we have Mary McDougall’s useful guide to navigating platform and app ESG options, plus lists of ESG fund managers’ favourite international shares.